Side Effects: The Beginning of the End for FSAs

Richard Sherwood
The Foundry, The Heritage Foundation
April 29, 2010

“If you like your current health coverage, you can keep it.” It was a key promise of Obamacare.

But the new law gives government a say in everything from the benefits you carry to the treatment you receive. And that means very real changes to existing coverage. One of those many changes derive from new restrictions on flexible spending accounts (FSAs).

FSAs allow users to put aside pre-tax dollars for out-of-pocket health expenditures such as co-pays, deductibles, eyeglasses, and dental work. Typically, it cuts out-of-pocket costs by around 20 percent. FSAs are especially valuable for consumers with chronic illness and others who have large foreseeable medical costs (families: think orthodontics!). And because FSA funds cannot be rolled over year to year, the accounts encourage responsible budgeting and use of health services.

Unfortunately, as The New York Times outlined recently, Obamacare sends FSA users an irresponsible message: stock up now before the law takes full effect.

Beginning in 2013, new regulations will prohibit FSA expenditures on certain health aids, such as over-the-counter drugs used by many to control chronic illness. Furthermore, FSA contributions will be capped at $2,500 per year.

One side effect of this arrangement: people suffering from chronic diseases will wind up spending more on co-payments for prescription drugs and doctor visits.

The New York Times gives the example of the Laskin family, who use every penny of their $4,000 FSA each year to pay for the prescription medication, over-the-counter drugs, vitamins, and doctor visits needed to control chronic illness. Under the new law, they “may find it more difficult to fit health care into an already squeezed budget.”

Advises Jennifer Calhoun, a principal with Mercer Health and Benefits, “There are still about two-and-a-half years before the lower flex-spend maximum takes effect. If you know a big elective medical or dental procedure is in the offing — like Lasik surgery, braces or long-needed tooth implants or caps — you may want to schedule these treatments while you can still pay for a big chunk of the out-of-pocket expenses with pre-tax dollars.”

It’s enough to make you wonder: If it’s smart to take care of your medical needs before Obamacare kicks in, maybe you’d be better off without Obamacare at all.

Rick Sherwood currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/About/Internships-Young-Leaders/The-Heritage-Foundation-Internship-Program

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Side Effects: The Beginning of the End for FSAs

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